June 5, 2012
EROI is usually measured at the point of production, but Hall estimates that an equal amount of energy is often used to transform raw energy into a useful form (moving it by pipeline to a refinery, then to the ultimate user, for instance) and another equal amount is needed to create and sustain the infrastructure to make use of the energy (building and maintaining roads and vehicles, for example, plus dealing with environmental impacts). Thus, an EROI of three is generally needed just to put energy to use, and an EROI of 5 to 10 is the minimum required to yield the net energy to run the rest of society. Few alternative energy sources (solar, wind, algae, etc.) have net returns that high.
The biophysical world limits our available resources. In addition to energy and mineral stores, we are also constrained by soil, water and the capacity of the atmosphere to absorb CO2 and maintain an acceptable climate. We have used more oil than we have discovered each year since 1979. No amount of “quantitative easing” or debt financing can ultimately get around these limits. As the saying goes, “Mother Nature bats last.”
That’s a brief overview of the book’s first theme: We have not paid adequate attention to the real drivers of economic activity and change, or to their future availability. The second theme explains why – the bankruptcy of economics.
The bankruptcy of economics
Economics should be the study of the economy, but Hall and Klitgaard contend that academic economics merely pretends to be a science. The book contains lengthy discussions on what it takes to be a science, which they consider to be a study of reality, with testable hypotheses and useful predictions. Economics is based on a number of assumptions that are clearly false: that people are rational; that they seek always to maximize their overall well-being by increasing their (monetarily-defined) economic condition; that they operate in a competitive free-market world where information and power are equally shared in the exchange process; that all inputs have easy substitutes; that input supplies are unlimited at some price; that the economic system tends toward equilibrium; that the sum of outputs equals the sum of inputs; that everything can (and should) have a monetary value; that economic growth is the default state of affairs… the list goes on.
These are handy assumptions for creating mathematical models, but not for creating something that reflects reality. Financial advisors have known for decades that people have many non-financial motives and make irrational decisions. From the earliest days of guilds and the formation of the Standard Oil Trust, businesses have attempted to control or eliminate competition to enhance their power. Hundreds of years of commodity price and economic output data show no tendency toward reaching a steady state. Even Mastercard knows that some things are “priceless” – and those are the most important things. Resource depletion has bedeviled many civilizations, and now it’s our turn.
Two of the assumptions are even more fundamentally in error. Inputs do not equal outputs, because all activity generates waste or decay, according to the Second Law of Thermodynamics. Thus, there has to be new net energy entering the system to keep it running – energy that may not always be adequate in the real world. More importantly, as anyone with a calculator can confirm, endless growth eventually becomes unsupportable. In the famous words of economist Kenneth Boulding, “anyone who believes that exponential growth can continue forever in a finite system is either a madman or an economist.” This is not a reality that economics has a way to address.
Would you like to send this article to a friend?Remember, if you have a question or comment, send it to .